MiFID2 Commodities Jonathan Melrose Rosali Pretorius October 2017
Introduction Overview of change in commodities rules Rules that apply across the board Market infrastructure and reporting Investor protection Rules that apply specifically to commodities Position limits, reporting & management Change in scope and coverage in instruments Impact on regulated firms Impact on non-regulated firms/ your clients Change in scope of exemptions Impact on regulated firms Impact on non-regulated firms/ your clients How does it affect you? Status? 1 / B_LIVE_EMEA1:4524101v1
Position limits 2 / B_LIVE_EMEA1:4524101v1 Limits set by regulators Commodity position limit rules apply to all persons, regardless of location and authorisation Also applies to positions held on aggregate group level but not, in our view, at investment manager level Limits apply to net positions commodity derivative traded on trading venue + EEOTC hedge positions of NFC + net positions of subsidiaries Hedge exemption Need application to regulator who set the limit for the particular contract Applies at person level only. NFC must apply. Cannot enter into position until exemption granted FCA powers Direct person to reduce positions (even if limit not reached) Stop persons from entering into particular contract Public censure & fines
Position reporting & management Trading venues trading commodity derivatives must report to regulator & ESMA daily & weekly & if thresholds reached, make info publicly available By 22:00 CET T+1 Traders must report own & clients positions in TOTV and EEOTC trades until end client daily to the regulator, but ESMA Q&A Q#3 &4 says only EEOTC needs to be reported, as TV reports TOTV positions to regulator FCA rule inconsistent Members of TVs must report own & clients positions to TV. Position management: Trading venues trading commodity derivatives must monitor open positions and be able: obtain info on size and purpose of position & owners require close out require person to put liquidity back into market 3 / B_LIVE_EMEA1:4524101v1
Market abuse MAR extended market abuse framework to MTFs & OTFs MAR extended to: o o o market manipulation i.r.o. of spot contract market (other than those in REMIT) with effect on financial instruments & market manipulation of financial instruments with effect on underlying spot markets benchmark manipulation inside information i.r.o. spot commodities 4 / B_LIVE_EMEA1:4524101v1
Financial instruments - Commodity Derivatives Scope C5: must or may be settled in cash other than as result of event of default or termination C6: can be physically settled, traded on exchange, MTF & OTF (other than wholesale energy products traded on an OTF that must be physically settled) C7: can be physically settled, OTC, not for commercial purposes & with characteristics of other financial instruments C10: derivatives relating to climatic variables, freight etc. C11: emissions and C4: derivatives relating to emissions allowances which may be settled physically or in cash Securitised derivatives with commodity underlying (transferable securities) Impacts 5 / B_LIVE_EMEA1:4524101v1
Activities & exemptions Activities: A1: reception and transmission of orders A2: execution of orders on behalf of clients A3: dealing on own account Exemptions: 2.1(k): Commodity dealer exemption deleted 2.1(d): Dealing on own account excludes commodities & emissions/derivatives 2.1(j) : Ancillary business 6 / B_LIVE_EMEA1:4524101v1
Ancillary business test Capital employed alternative to main business test 7 / B_LIVE_EMEA1:4524101v1
Why does it matter? Practical issues: authorisations & business structuring Impacts Timing & uncertainty non-financial entity and third countries would not require authorisation / would not be subject to the clearing obligation if it was based in the EU & subject to EU law Cut back of exemptions means greater focus on geography What are the activities/services in the EU? Third country entities 8 / B_LIVE_EMEA1:4524101v1 ECP & professional Registration with ESMA National regimes Retail Option: branch mandatory UK: overseas persons
Clearing and trading obligations Applies to financial entities & NFC+ Does not apply to non financial entity below clearing threshold Clearing and trading obligation apply to firms that would not be subject to the clearing obligation if they were based in the EU & subject to EU law o Commodities not mandated for CO or TO yet but if firm has to become financial counterparty because of change in perimeter, they will be caught o o TO limited to small subset of interest rate swaps & CDS Phase-in for different types of counterparties o 9 / B_LIVE_EMEA1:4524101v1
Capital Requirements UK based commodity dealers structured as agent/arrangers Booking vehicles now in scope Exemptions in CRR Art 493 & 498 large exposures and own funds requirements do not apply to firms the main business of which is dealing in C5, 6, 7, 9 and 10 MiFID1 instruments and to whom ISD did not apply exemption extended until 31 December 2020 Commission to report on appropriate prudential regime for commodity dealers & whether sub-category for those whose main business is energy supply is desirable. EBA Opinion 29 September: Commodities firms to be subject to same requirements as other investment firms, subject to certain exceptions. In particular no exceptions for commodity speculating firms Where derivative trading is complementary to group, special requirements may apply TBD. 10 / B_LIVE_EMEA1:4524101v1
Client classification Art 30(2) MiFID2 says investment firms must be included as per se ECP. Member states may include o Third country entities equivalent to investment firms as ECP o Other entities meeting proportionate requirements must request, be per se professional (authorised, large, government); warning requirements Commodity and commodity derivatives dealers who are authorised or regulated in EU under Directive or without reference to Directive and entities authorised or regulated in a third country are automatically professionals 11 / B_LIVE_EMEA1:4524101v1
Key contacts Jonathan Melrose Partner T +44 20 7825 4514 E jonathan.melrose@simmons-simmons Rosali Pretorius Partner T +44 20 7825 4187 E rosali.pretorius@simmons-simmons 12 / B_LIVE_EMEA1:4524101v1
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